In Solera Holdings, Inc. v. XL Specialty Insurance Co., 1 the court examined Section 220 of the Delaware General Corporation Code. The provision states that, subject to certain conditions and qualifications, any shareholder voting against a merger on the grounds that the consideration is inadequate “shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock.”1
The Solera case raised a number of coverage issues. The underlying case involves an action by minority shareholders who demanded a judicial appraisal of the fair value of their shares. Many states, including Delaware, have laws governing the rights of dissenting shareholders who allege they are being forced to sell their stock.
Solera was a publicly traded company until it was acquired by a private company in March 2016. Solera first announced the transaction in September 2016. Several shareholders filed a merger objection suit, which was dismissed. Just before closing, several Solera shareholders filed a Delaware appraisal action, seeking fair value for their shares. The petitioners contended that their shares were each worth $84.65. The appraisal action went to trial in June 2017. In July 2018, the court determined that the fair value of the petitioners’ shares was $53.95 per share, an amount less than the merger price. The court ordered the company to pay the petitioners $53.95 per share, plus $38.3 million in prejudgment interest. Solera incurred $13 million in defending the appraisal action.
Solera notified its insurers of the appraisal action after the appraisal action trial but before the verdict was announced. The primary insurer denied coverage for the appraisal action, and Solera filed an action for breach of contract and declaratory judgment, seeking coverage for the prejudgment interest and defense fees it incurred in the appraisal action. Several of the excess insurers filed a motion for summary judgment on several of the coverage issues, and Solera cross-moved for summary judgment as well.
In a July 31, 2019, opinion, the Delaware Superior Court judge, applying Delaware law, denied both the insurers’ summary judgment motion and Solera’s cross-motion as well.
The court addressed three issues: whether an appraisal action is a securities claim as defined by the primary policy; whether the prejudgment interest award can represent loss within the meaning of the policy, even if the amount of the fair value payment is not covered loss; and whether or not coverage is precluded for the defense fees Solera incurred before providing the insurers with notice of the claim and obtaining consent from Solera’s counsel.
Is an appraisal action a securities claim?
The court rejected the insurers’ assertion that an appraisal action is not a securities claim because there is no need for the plaintiffs to prove a wrongful act. The court found that the policy only required an allegation of a violation, which simply means a breach of the law or the contravention of a right or duty.
The court found that the plaintiffs did allege a violation and, therefore, a securities claim.
Is prejudgment interest covered, even if the actual payment of fair market value is not included in the definition of loss?
The court found that nothing in the policy limits coverage for an interest award to interest on a covered judgment. Had the insurers intended to limit coverage in that manner, the policy language easily could have reflected that limitation. In fact, the definition of loss specifically includes pre- and post-judgment interest, but did not state that the interest covered must be imposed on a covered judgment. Having left out that limitation, the carriers could not use the court to read it back in.
Is the coverage for pre-notice defense expenses?
Finally, with respect to the insurers’ argument that there was no coverage under the policy for the pre-notice defense expenses because Solera incurred those costs without the insurers’ consent, the court first determined that Delaware law implies a prejudice requirement in consent clauses in insurance policies. Therefore, an insured who has breached a consent provision suffers forfeiture, only if the insured can prove by competent evidence a lack of prejudice to the insurer. The court denied summary judgment on this issue, giving the carrier the opportunity to prove prejudice.
What does this ruling mean for our insurance clients?
The decision on the prejudgment interest issue is unexpected, but depends on the specific language of the definition in the particular policy. The court noted some D&O insurance policies expressly provide that their policies provide coverage for pre- and post- judgment interest only on covered judgments. The definition of loss in this policy did not contain any suggestion that the policy’s coverage of interest applied only to interest on covered judgments.
Most surprising is the court’s inference of a notice prejudice rule into all aspects of the policy, including consent to counsel. As far as we can tell, this is an issue of first impression, at least in Delaware.
Further, this logic does not limit the holding to the consent to counsel. It could be that Delaware courts, if they follow this opinion, will create an expansive notice prejudice rule.
Again, however, it is important to look at the facts of this specific case. Solera informed the carriers of the earlier merger objection case long before the appraisal action was brought. Therefore, the appraisal action relates back to the merger objection case, for which Solera had given timely notice.
The decision notes a potential out for carriers. The court wondered why the carriers did not argue that any claim required the allegation of a wrongful act. Instead, the carrier limited its coverage dispute to whether an appraisal action was a securities claim and, because the carriers did not raise the issue, the court did not have to decide it.
